International Review of Business Research Papers

Volume 6. Number 4. September 2010. Pp. 457 – 466

The Balanced Scorecard and its Application as a

Strategic Decision-making Tool
Aswini Kumar Dash* and Biswajit Das**
This paper reviews the various aspects of the Balanced
Scorecard, which is a strategy implementation tool based on
defining and monitoring the key factors important for the business;
and also its application in the new product development process
and the goal-driven measurement methodology. The product mix
of jobbing type of industries is very important from the point of view
of their long-term profitability. The study discusses the importance
of the critical success factors (both internal and external to the
firm) that holistically define the attractiveness of products / market
segments, and then suggests modification and extension of the
Balanced Scorecard so that it can be used as an objective
strategic decision-making tool for product portfolio management.

Field of Research: Strategic Management, Jobbing Industries.

1. Introduction
A firm‘s success probability depends whether its business strengths not only
match the key success requirements for operating in the target market, but also
exceed those of its competitors. In any multi-product manufacturing scenario,
profitability on a long-term basis is a function of the product mix. Moreover,
meeting existing demand and/or completely utilizing capacity do not always
coincide with or guarantee maximum profitability. In jobbing type of industries,
erosion of profits due to improper product mix is not a very uncommon
phenomenon; sometimes leading to even non-viability of the business. The
strategy of the firm has to be so designed that there is a proper fit between
external opportunities and internal strengths while working around external
threats and internal weaknesses. This study first looks into the various aspects of
the Balanced Scorecard, which is effectively used as a strategy implementation
tool by identification and monitoring of factors important for the firm to be
competitive and profitable.

However, most of the common strategy formulation methods like Strengths-

Weaknesses-Opportunities-Threats (SWOT) analysis or Product Life Cycle
(PLC) analysis are qualitative tools involving a lot of subjectivity in the process of
decision-making. This paper seeks to formulate a business model by modifying
and extending the Balanced Scorecard into a decision-making tool so as to
eliminate subjectivity and objectively define the holistic market attractiveness of a
*Aswini Kumar Dash, Larsen & Toubro Limited, Kansbahal, Odisha, India and KIIT School of
Management, Bhubaneswar, Odisha, India, e-mail: [email protected]
**Dr. Biswajit Das, KIIT School of Management, Bhubaneswar, Odisha, India, e-mail:
[email protected]
 Dash & Das

product / market segment, which would help in identifying the right product mix in
jobbing type of industries.

2. Literature Review
Comprehensive analysis of current and foreseeable business scenario, balanced
against capacity, capability and investment, can help manufacturers optimize
their product mix and prioritize their sales and marketing efforts to minimize risk
and maximize profitability on a long-term basis.

The ability of a company to mobilize and exploit its intangible or invisible assets
has become far more decisive than investing in managing physical, tangible
assets (Kaplan and Atkinson, 1998). Intangible assets enable an organization to
develop customer relationships that retain the loyalty of existing customers and
enable new customer segments and market areas to be served effectively and
efficiently, introduce innovative products and services desired by targeted
customer segments, produce customized high quality products and services at
low cost with short lead times, mobilize employee skills and motivation for
continuous improvements in process capabilities, quality, and response times,
and deploy information technology, data bases, and systems.

The Balanced Scorecard: It is a set of measures that allows for a holistic,

integrated view of business performance. The scorecard was originally created to
supplement ―traditional financial measures with criteria that measured
performance from three additional perspectives—those of customers, internal
business processes, and learning and growth‖ (Kaplan and Norton, 1996).
Subsequently, it was developed as a strategic management system linking long-
term strategy to short-term targets, and to communicate the multiple, linked
objectives that companies must achieve to compete on the basis of capabilities
and innovation, not just tangible physical assets. The Balanced Scorecard serves
to identify the major strategically relevant issues of a business and describes and
depicts the causal contribution of those issues that contribute to a successful
achievement of a firm‘s strategy (Figge et al, 2002).

The Kaplan and Norton Balanced Scorecard looks at a company from four
perspectives as illustrated in Fig.1.

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Fig.1: The Balanced Scorecard

Financial:
How do we look to
shareholders?

Internal
Customer: Vision Business
How do Mission Process:
customers Strategy What must
see us? we excel at?

Innovation and Learning:

Can we continue to improve
and create value?

By viewing the company from all four perspectives of financial, customer, internal
business process, and learning and growth, the Balanced Scorecard provides a
more comprehensive understanding of current performance (Alice and
Carpenter-Hubin, 2000-01). It thus translates mission and strategy into objectives
and measures, organized into these four perspectives.

It retains the financial perspective since financial measures are valuable in

summarizing the readily measurable economic consequences of actions already
taken. Financial performance measures indicate whether the company‘s strategy,
implementation, and execution are contributing to bottom-line improvement.

In the customer perspective of the Balanced Scorecard, managers identify the

customer and market segments in which the business unit will compete and the
measures of the business unit‘s performance in these target segments. This
perspective typically includes several core and generic measures of the
successful outcomes from a well-formulated and implemented strategy. The core
outcome measures include customer satisfaction, customer retention, new
customer acquisition, customer profitability, and market and account share in
target segments.

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In case of the internal business process perspective, executives identify the

critical internal processes in which the organization must excel. The critical
internal business processes enable the business unit to deliver the value
propositions that will attract and retain customers in target market segments, and
satisfy shareholder expectations of excellent financial returns.

The learning and growth perspective identifies the infrastructure that the
organization must build to create long-term growth and improvement. The
customer and internal business perspectives identify the factors most critical for
current and future success. Businesses are unlikely to be able to meet their long-
term targets for customers and internal processes using today‘s technologies and
capabilities. Also, intense global competition requires that companies continually
improve their capabilities for delivering value to customers and shareholders.
Organizational learning and growth come from three principal sources: people,
system, and organizational procedures. The financial, customer, and internal
business process objectives on the Balanced Scorecard will typically reveal large
gaps between existing capabilities of people, systems, and procedures and what
will be required to achieve targets for breakthrough performance. To close these
gaps, businesses must invest in re-skilling employees, enhancing information
technology and systems, and aligning organizational procedures and routines.
These objectives are articulated in the learning and growth perspective of the
Balanced Scorecard.

The Balanced Scorecard meets several managerial needs. Firstly, it brings

together, in a single management report, many of the seemingly disparate
elements of a company‘s competitive agenda: becoming customer oriented,
shortening response time, improving quality, emphasizing teamwork, reducing
new product launch times, and managing for the long term. Secondly, it guards
against sub-optimization. By forcing senior managers to consider all the
important operational measures together, the Balanced Scorecard lets them see
whether improvement in one area may have been achieved at the expense of
another (Kaplan and Norton, 1996).

Many leading, large Indian companies have implemented Balanced Scorecard in

their organizations. Tata Steel, which was established in 1907, is Asia‘s first and
one of India‘s largest integrated steel plants in the private sector. It achieved
business excellence and the status of the lowest cost producer through several
strategic initiatives over a period of time. The company found the Balanced
Scorecard a good tool to translate strategies into measurable goals (metrics) and
communicate metrics and strategic actions to the lower levels of the organization.
It uses the Balanced Scorecard to break down strategy into its component
elements and track performance from the top to the bottom (Pandey, 2005).

Application of the Balanced Scorecard in the New Product Development process:

The application of the Balanced Scorecard approach to product innovation is
promising for decision-making as it establishes the conceptual basis for obtaining

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a full integration of a Performance Measurement System into the New Product

Development process (Jiménez-Zarco et al, 2006). The Balanced Scorecard can
be adapted to the innovation process. This objective involves translating the
usual performance dimensions into operative indicators as well as proposing new
performance dimensions and indicators. In short, the proposal attempts to build a
system that allows to measure quality and performance throughout the new
product development process and also detect those factors that condition the
final and sustainable success of product innovation.

Traditionally, the four main perspectives of the scorecard permit a balance

between short-term and long-term objectives, between desired outcomes and the
performance drives of those outcomes, and between hard objective measures
and softer, more subjective measures. While the multiplicity of measurements on
a scorecard system can sometimes be seen as confusing, properly constructed
scorecards contain a unity of purpose since all the measurements are directed
toward achieving an integrated strategy.

Typical innovative financial goals have to do with profitability, growth and

shareholder value. Even though the primary aim in launching a new product is to
return a profit to the firm in the long run, short term profitability criteria continue to
be the most frequently used measurements of performance in studies of new
product success. At the same time, survival can be measured by cash flow,
success by quarterly sales growth, and operating income by division, and
prosperity by increased market share by segment and return on quality.
Nevertheless, other financial measurements that should be taken in this
evaluation are shareholder benefits, profit-margin, payback period, cost and
development/investment costs, risk assessment and cost-benefit data.

The customer-based measurements of new product performance include

customer acceptance and satisfaction, perceived product quality, customer
acquisition and customer retention. Others have also defined success from the
customer point of view as a new product which satisfies new needs, wants or
desires; shows outstanding performance compared to other products, and
benefits from an imaginative combination of product and communication. It is
also suggested that customer loyalty criteria as well as perceptions of the
superiority of the product in terms of added value, quality or brand image should
be considered among the customer-based criteria.

Regarding the company-based criteria, it is necessary to incorporate certain

indicators relating to the degree of market orientation, and consequently, the
degree of customer orientation; the level of quality offered to the customer; and
orientation towards innovation and the ability to anticipate the needs and
preferences existing in the market.

Market potential, which is part of the market factor, is an essential aspect that
should be considered and valuated when establishing the success possibilities of

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a new product market launch. It is defined by the level of the market‘s growth and
size, the company market position, the level of customer loyalty and satisfaction
with existing brands, the degree of familiarity with the product class and the lack
of competition in the marketplace. As another determinant of the new product‘s
success, this factor is used in most strategy models to allocate resources to new
and existing businesses or products.

In parallel to the market attractiveness research, the current competition and its
operation and reaction ability towards the firm‘s actions should be contemplated.
Hence, in order to estimate the success capability of the innovation process as
well as its market performance, it is necessary to use indicators that evaluate
capacity for reaction of the competition, the degree of marketing orientation of the
competition, the quality of the competitors‘ products, and the image of
competitors‘ products.

Another set of factors that should be taken into account are the product
characteristics, which include the product advantage, product-company synergy,
and product-market synergy. Products that deliver a superior service outcome
are competitive products, offer unique customer benefits, provide faster, more
efficient and more reliable services, have a higher quality image, offer better
value and are usually more successful.

Furthermore, product-company synergy constitutes a strong predictor of success.

This construct is related to the degree to which the resources required to develop
market innovations fit the firm skills. In other words, this factor involves the firm‘s
ability to benefit from its existing delivery systems, human resources, sales,
market research system and managerial skills. More specifically, the literature
recognizes two main types of service-company synergy, i.e., the innovation-
marketing synergy, and the innovation-technology synergy. Whereas innovation-
marketing synergy indicates whether the new service can take advantage of the
current marketing skills and resources (e.g. sales force, distribution, advertising,
promotion, market research and customer service/delivery), innovation-
technology synergy suggests whether the new service can make use of the
current technological skills and resources (e.g. production and engineering).

Finally, the last dimension to be considered includes the evaluation of the

marketing factors. Marketing factors involve the marketing strategy employed,
people‘s knowledge, distribution channel support and the operations
management system.

The Balanced Scorecard and the Goal-driven Measurement Methodology: Using

the Balanced Scorecard framework, an organization can systematically set
enterprise strategic goals for each perspective and develop a set of indicators
and measurements for the desired outcomes and performance drivers that will
enable the achievement of the enterprise outcomes. The result is a set of
interconnected goals and measurements with defined cause-and-effect

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relationships. Apart from the Balanced Scorecard, Goal-driven measurement

methodology is often employed to develop enterprise-wide measures (Goethert
et al, 2003). The authors suggest an approach for combining the techniques,
taking advantage of the best of each. The synergistic application of the balanced
scorecard and goal-driven measurement methodologies help in developing
measures and associated indicators for measuring an organization‘s health and
performance. The Balanced Scorecard encourages an organization to take an
introspective look at its practices. Through this iterative approach, an
organization‘s strategic goals and sub-goals are mapped to the balanced
scorecard and refined. The goal-question-(indicator)-measurement methodology
is then applied to identify indicators and measures for each scorecard dimension.
The process is typically iterative and contains the following four steps: Clarifying
the mission and vision statements, Deriving strategic goals and sub-goals using
goal-question-(indicator)-measurement, Mapping of sub-goals to Balanced
Scorecard, and Applying Goal-question-(indicator)-measurement to defining
success criteria for each sub-goal, posing relevant questions and postulate
indicators that address each sub-goal in each quadrant of the Balanced
Scorecard, determining requisite measures or data elements that allow indicators
to be crafted.

From this, the organization can set enterprise-strategic goals and develop a set
of indicators and measurements for the desired outcomes and performance
drivers. The goal-question-(indicator)-measurement approach follows as a
disciplined way for deriving the required measures and indicators. The approach
is intended to help an organization determine the best measures and associated
indicators for its unique environment. Using this approach, an organization can
systematically set goals for each of the perspectives of the Balanced Scorecard
and develop a set of strategic measures and indicators to determine and track
the quality of outcomes and organizational performance.

3. Methodology and Research Design

The Balanced Scorecard is derived based on the strategy of the firm, with the
major factors affecting the firm / market segment / product being part of it. Since
each of these factors have a defined performance indicator, their continuous
evaluation brings out whether the firm is in line with its vision. The strategy of a
company is designed based on internal factors (which are mostly controllable)
and external factors (on which the company does not have any direct control,
and hence is based on experience and judgment of the analyst).

In order to make the scorecard more useful and practical, it is necessary to

assign weights to different measures (both financial and non-financial) on the
basis of their importance to the organization for specifying trade-off between
financial and non-financial measures. To make the scorecard more efficient, a
large number of both financial and non-financial measures should be included in

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it, which should be continually modified on the basis of measurement feedback

(Ghosh and Mukherjee, 2006).

The research aimed to modify and extend the Balanced Scorecard into a
decision-making tool by adopting the following process with three major steps.

The first step in design of the model involves identification of the critical factors
which affect business. A holistic view should be adopted and all possible factors
to be considered, which may be internal to the company (alignment with the
vision and strategy of the company, capability, capacity, capital and other
resources, future prospects, technology, etc) or guided by external environment
(political, legal, social, economic, locational, competition, etc). Additional factors,
which affect business risk, are also to be considered. The process of
identification of the critical success factors should be based on earlier literary
work on various aspects of business as well as feedback from personal
interviews and focus group sessions involving people working in jobbing
industries.

The next step in the process involves assigning a weight to each of the above-
identified critical success factors, which would reflect its relative importance from
business point of view, with respect to the other factors affecting the
attractiveness of a product / market segment. This process is essentially based
on the feedback of a questionnaire wherein the respondents are required to rank
each of the factors, based on which the weights of these factors are arrived at.
Since the weights pertaining to each of these factors are valid under certain
conditions of business environment, both external as well as internal to a firm,
they should be reviewed frequently, which should be at the discretion of the
analyst.

In the final step of this process, different products / market segments are to be
rated against each of the factors identified above on a pre-defined scale.
Multiplying the score of each factor with the weight assigned to it in the earlier
step gives the weighted score for that factor. Sum of all such weighted scores
gives the total score for that product / market segment. Comparison of the scores
of different products / market segments objectively defines their relative
attractiveness.

Let the number of critical success factors pertaining to Financial, Internal

Business Process, Innovation and Learning, and Customer perspectives be m, n,
o, and p, respectively and the weighted factors be designated as WFi, WBj, W Ia,
and W Cb, respectively, where i, j, a, and b are all natural numbers within the
range from 1 to m, n, o, and p, respectively. If each of the above critical success
factor for a particular product / market segment is rated over a 5–point scale
(from 1 to 5, with 5 being the most favourable from business point of view), then
the score for the qth product / market segment can be depicted as follows:

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m n o p
Pq = ∑ W Fi x Ri + ∑ W Bj x Rj + ∑ W Ia x Ra + ∑ W Cb x Rb
i=1 j=1 a=1 b=1
….……… (1)
Where, 1 ≤ Ri, j, a, b ≤ 5,
{R : R ε N}, {m : m ε N}, {n : n ε N}, {o : o ε N}, {p : p ε N}, and {q : q ε N}
Higher the score, more attractive is the product / market segment for the firm.
Comparison of the scores of different products / market segments holistically and
objectively brings out the difference in their attractiveness.

4. Discussions and Conclusion

After experiencing the effect of the global recession which started in the year
2008 when most companies were already part of the meltdown by the time they
had realized, the importance of risk management in business and the speed of
change to suit to the prevailing economic scenario came into the fore. This
reinforces the school of thought which propagates the view in business that even
though the critical factors would be the same from strategy point of view, yet their
importance would continuously change depending upon the prevailing business
environment, i.e., the external factors. However, the Balanced Scorecard, which
even though identifies the critical factors, does not prioritize the same based on
their importance and every factor of the Balanced Scorecard is considered to be
equally important, whatever may be the changes to the external business
environment. Moreover, the factors considered in the Balanced Scorecard are
only a few important ones, rather than being an exhaustive list which would
holistically define the attractiveness of a product or market segment based on all
the major aspects of business.

The market segments/products get identified keeping in view the long-term

strategy of the firm. However, their priorities would get fine-tuned depending
upon the external factors. Considering an example of a product where there is a
huge demand–supply gap, and the market of which is spread all over the globe.
Then in such a case, even if the product is the same, its attractiveness will be
different for different markets depending on a lot of other factors such as the
quality of the customer (which encompasses the reliability of the customer,
expected price and other terms, etc), locational factors (geography, social, legal
and political conditions prevailing in the market, etc), economic scenario (like
availability of cheap credit, Government rules and regulations, etc) and many
other factors. Each of these factors will have a certain importance under a
particular set of external conditions. For example, credit terms will have a greater
importance over margins during economic recession than when there is no
liquidity problem, while margins would play a greater role under strong economic
conditions.

The process adopted has certain advantages such as, it encompasses a degree
of objectivity into the process of decision-making; makes it possible to holistically
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compare two different products while designing the product portfolio of a jobbing
firm; and is flexible so that the effect of any significant change in the external
environmental conditions can be suitably adapted into the system.

The Balanced Scorecard approach does not prioritize the critical success factors,
even under different conditions of external business environments, and considers
all factors to be equally important. As an extension of the original idea, and to
make it more representative of the actual business environment, the Balanced
Scorecard can thus be suitably modified into a decision-making tool by attaching
weights to each of the critical success factors and simulating different scenarios.
This helps in finding out the net effect of all the factors together so as to take the
best-informed strategic decision. Its importance in design of the product portfolio
in a jobbing industry is immense since it helps in objectively and holistically
comparing different products.

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